August 7, 2017
Goldman Sachs Global Investment Research 4
Portfolio Manager’s Summary
Regulatory changes and new technologies are re-shaping China’s banking activities. The
pace and magnitude of the development is vastly different versus the rest of the world. A
group of hybrid tech/finance companies, such as Ant Financial, Tencent, JD and Ping An
have emerged at the heart of China’s financial industry, making financial services more
convenient and accessible for consumers. This has resulted in China leapfrogging from a
world where consumers largely relied on cash, to cashless or even cardless transactions,
paying, borrowing and investing, all through their smartphones. We expect the changes to
continue over the next 5-10 years, with new entrants emerging and new profit pools being
created. Within this report – our first in a series – we lay out addressable markets with large
untapped consumer demand, then explain three key shaping trends that investors need to
understand about the China FinTech space before looking at individual business lines, such
as the high integration, evolving regulations and internationalization. Lastly, we focus on
third-party payment, an area with the most innovations so far, through ‘real-world’ cases
and a deep dive into business models. In our view, payment is a crucial gateway to most
other services, and where the innovators have gained the strongest footholds in China.
Untapped consumer demand drives FinTech opportunities:
Historically, the traditional banks in China focused more on serving the state-owned
enterprises, leaving the financial needs of consumers and SME’s underserved. As China’s
economy slows, consumer spending has become pivotal to transform the economy that
was heavily reliant on investment. Some innovators, before they enter the financial sector,
had already built a sizeable consumer (and SMEs) user base in their core businesses. To
name a few: Ant Financial (33% owned by Alibaba, China’s largest e-commerce platform)
and Tencent (tech giant who owns China’s most popular messenger app WeChat), or Ping
An (China’s largest non-state owned financial company with a focus on consumer). With
the help of technology and the initially supportive regulatory environment, the innovators
were able to tap into and expand their existing user base, and capture the unique
opportunity set of Chinese consumers. We highlight these addressable markets:
Payment: US$4.6 trillion in 2020E in consumption-related third-party payment
value,
from US$1.9 trillion in 2016. The key drivers would be e-commerce growth and
increasing penetration in offline retailers as third-party payment replaces cash.
Lending: US$764 billion in 2020E in loan balance from non-traditional players
(internet lenders and consumer finance companies), from US$156 billion in 2016. The
majority of the addressable market comes from consumers (US$480 billion) – China’s
consumer credit is only 7% of GDP vs 20% in the US in 2016 (excluding mortgages).
Investing: US$11.9 trillion in 2020E in financial asset under management
, from
US$8.3 trillion in 2016. We note that the innovation in the asset management industry
is still at an early stage – much of it is happening within or driven by the incumbents
themselves. So it would be too early to define what is non-bank and what is not.
Key trends that are shaping the China FinTech Ecosystem
Integration: A few hybrid tech/finance companies have started to dominate the space
by owning the
entire supply chain and distinctive ecosystem around it. Others are
trying to enter as they strive to
close the loop of their own. The ‘integration’ mindset
defines how Chinese entrepreneurs view their strategy, competition and profitability.
Regulation: Regulation plays a vital role in determining the future evolution. In China
it is still
pro-growth, but getting more sophisticated in risk management/customer
protection
. Private capital has uncharacteristically high participation in the FinTech
infrastructure build-out vs other industries. We will pay particular attention to the
evolving regulations and dynamic balance between regulators and innovators.
Why read this report?
See five real-world
case studies for
payments on pages
25-26, 43, 48, 53
Infographic on China
FinTech ec
osystem:
Pages 6-7
List of key players:
Page 9
Total addressable
market
Trend #1: Integration
New conglomerate
Ecosystem
Closed-loop
Trend #2: Regulation
Pro-growth
Risk management
Private capital
participation
Future of Finance: The Rise of China FinTech
